Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices

26 Pages Posted: 30 Dec 2000 Last revised: 25 Dec 2022

See all articles by Robert J. Barro

Robert J. Barro

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Silvana Tenreyro

London School of Economics (LSE)

Date Written: December 2000

Abstract

Shifts in the extent of competition, which affect markup ratios, are possible sources of aggregate business fluctuations. Markups are countercyclical, and booms are times at which the economy operates more efficiently. We begin with a real model in which markup ratios correspond to the prices of differentiated intermediate inputs relative to the price of undifferentiated final product. If the nominal prices of the differentiated goods are relatively sticky, then unexpected inflation reduces the relative price of intermediates and thereby mimics the output effects from an increase in competition. In an open economy, domestic output is stimulated by reductions in the relative price of foreign intermediates and, therefore, by unexpected inflation abroad. The various versions of the model imply that the relative prices of less competitive goods move countercyclically. We find support for this hypothesis from price data of four-digit manufacturing industries.

Suggested Citation

Barro, Robert J. and Tenreyro, Silvana, Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices (December 2000). NBER Working Paper No. w8043, Available at SSRN: https://ssrn.com/abstract=254079

Robert J. Barro (Contact Author)

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Silvana Tenreyro

London School of Economics (LSE) ( email )

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